Kevin Gets Acknowledged by a Real Economist

As I have written before, one of my goals is to resolve the differences between Arnold Kling’s and Scott Sumner’s views on macroeconomics. There is now some evidence that I may actually understand what is going on.

Will Ambrosini, wrote about a Blanchard and Gali paper that combines two standard macroeconomic models and then simulates various shocks to the economy. The interesting bit is when they look at a “real” shock: a decrease in productivity of 1%. This corresponds to one of Kling’s “recalculation” events where the economy has to figure out how to redeploy resources.

Well, the result depends on the monetary policy used by the Fed. If the Fed targets just inflation, unemployment spikes almost 10 percentage points before gradually improving. Sound familiar? But if the Fed targest both inflation and unemployment, unemployment only goes up a little over 1 percentage point.

My intuition was that targeting inflation and unemployment is similar to targeting NGDP as Sumner advocates. I sent him email to see if I was right and lo and behold, Sumner posted about it, acknowledging that my intuition lines up with his. So I guess I’m getting a handle on this stuff.

In addition to the ego gratification, this also resolves the tension between Kling and Sumner. Yes, real shocks require recalculation. But monetary policy can make the recalculation easier or harder. Think of money as the lubricant in the recalculation engine. If you put more in, there is a lot less friction and waste heat.

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10 Responses

Money printing does scare people back into acquiring real assets and thus monetary policy can be a lubricant. Devaluations marked the turning points in the GD. However it does take a recalculation to accomplish the reallocation of resources including labor. I’d argue that Kling’s model of the economy (link below) can account Sumner’s NGDP targeting carrot/stick, but sumner’s model barely has elements of feedback, learning, and complexity of the real world:http://econlog.econlib.org/archives/2009/09/the_recalculati.html

Isn’t it more of an ethical question whether sacrificing savers for the benefit of people whose jobs are no longer needed is justified? I do get that there’s a contagion effect here that increases the # of unemployed arguably unnecessarily.
But wasn’t there also a reverse effect on the way up? How can we ponder these questions without an ethical context? It’s not like we all share proportionally in unemployment losses, ngdp gains, etc…

To you first point, I strongly disagree. Sumner’s the one who think expectations of the future drive behavior today through arbitrage-like feedback. Moreover, it’s Sumner’s approach that better predicts the output of B&G’s model, which has quite a number of real world feedbacks built into it. Basically, Kling doesn’t believe money is important. I think this ignores pretty good evidence that money is an emergent phenomenon.

To your second point, I refuse to be drawn into anything that tries to tie ethics to macroeconomics. The macroeconomy is an emergent property of society. Therefore, it’s effects cannot be decomposed and ascribed (even pro rata) to individuals. But effects on individuals is what ethics are all about. So they are incompatible frameworks.

I’m not trying to criticize your views, not that you’d care, but i’m just want to reconcile this for myself.

1. I think we can argue until we’re blue that the general version of one guy’s model encompasses more of the real world than the specific version of the other guy’s.

2. Your refusal statement reminds me of the one i made a while ago about Sumner myself. I’m pretty sure it’s not a statement about your attitude toward changing your mind and learning in general, but more of a signal about your history with the topic. 🙂

3. Macroeconomy is definitely an emergent property of the economy, but are incentive schemes not part of economics? Aren’t the fed’s (and policymakers’) tools a way to change the incentive scheme between savers and borrowers, cash and assets, individuals and society and by definition it gives these policy makers the ability to “teach” the society and reward/punish certain (risk taking) behaviors? So instead of getting stuck in the abstract, here’s an example.

Monetary policy is definitely important (specific Kling model is thus “wrong”). First countries to devalue in the great depression saw their nominal AND real GDP’s turn around faster than the rest. Japan was slow and conservative with their monetary stimulus in the 90’s and their nominal gdp has lost a decade or two, but their real gdp (total and per capita) didn’t suffer quite the same fate although it did stagnate. BUT we can also say that countries that devalued pursued policies that punished “savers”, while Japan’s didn’t. We can also that devaluations reward the society at the expense of the individual choice. isn’t there an ethical implication to TEACH the society that we socialize the risks more so than the rewards? Macroeconomics IS an emergent property, but the Fed’s tools control incentives for group and individual actions and learning. I’m saying we cannot ignore that aspect and merely focus on the AGGREGATE economy. Unemployment rate isn’t equally shared by all the population. x% are unemployed and 1-x% are employed so any policy to change the status quo is an ethical choice. economics is a study of resource allocation first and general policies in a distant second.

“I’m saying we cannot ignore that aspect and merely focus on the AGGREGATE economy.”

And I’m saying we should. But I’ve had this debate before, it wasn’t productive, and you haven’t said anything that wasn’t covered in that debate. If you’d like to start your own thread on ethics and macroeconomic policy, feel free. I’ll jump in if I see something new.

Re: comparing ethics to emergent macroeconomy… While they are at different levels, there is feedback in both directions. Whatever monetary policy you choose affects whether your ethical values at the individual level are upheld or not.

I believe policy should always be created with the following dynamic in mind: Will the policy incentivize individual choices such that the aggregate emergent behavior (and emergent properties of the system as a whole) promote the individual values we agree need to be promoted. If so, the policy is we can call the policy a moral good, if not it’s a moral hazard.

You make my point on ethics for me. Please explain to me how you know in a complex non-linear system with emergent behavior how individual choices affect outcomes? If you’ve worked out a general solution to this, there might be a Nobel in your future.

Incentive creators and enforcers (fed, gov’t, boards of directors, judicial system) don’t have control over “individual choices”, they have control of rewards/punishments AFTER the individual choices have already been made, which means that those macroeconomic policymakers are tied to ethics. 10 people on an island. 9 buy into a fishing pyramid scheme, while i build a house. Winer comes (brutal tropical one 🙂 ) and the “government” of the island orders me to share my house cause it’s better for the group. what do you think i’ll be doing next summer? why would i build a house? moral hazard

I think all of us here can agree that bailouts are way off the reservation of proper macroeconomic policy. What I don’t want to argue is the ethical implications of “typical” monetary measures taken by the Fed.

I’d be willing to argue the ethics of fiscal policy. But my guess is that most of us here would agree that the current practice in the US leaves a lot to be desired from an ethical point of view because the decisions of who gets stimulus money are driven by patronage rather than merit.

Absolutely, but wouldn’t you agree that inflation is a form of taxation arguably more unfair than taxes, because at least those can be designed to target specific groups/activities.

So Sumner’s 5% NGDP idea is fair because it”s not a game-changer, but his blaming the Fed for not staving off the crisis isn’t fully justified, because an ability to prevent the panic isn’t necessarily fair. it would be a game changer and thus a political event.